Escauriaga vs. Fitness First Phil., Inc.

A worker who performs tasks integral to the employer’s business, is subject to the employer’s control over the means and methods of work, and is economically dependent on the employer is a regular employee, irrespective of any contractual label as an independent contractor. The power of control is the determinative factor; contractual clauses reserving the right to assign, impose rules, set performance standards, and mandate training indicate an employer-employee relationship. Fixed-term employment contracts that are used to block the acquisition of security of tenure are void for being contrary to law and public policy.

Fitness First Phil., Inc. operated health clubs and offered integrated sports facility management services, including personal training. It initially engaged several individuals as fitness instructors who later transitioned to freelance personal trainers under successive one-year agreements. The freelance trainers sold and conducted physical training sessions for the company’s clients using the company’s equipment. In March 2017, the company required the freelance trainers to register their freelance business with the Bureau of Internal Revenue, offering a commission increase for compliance and threatening termination or non-renewal for non-compliance. The trainers refused, claiming they were regular employees, and subsequently filed a complaint for illegal dismissal.

• Engagement and Reclassification: Fitness First Phil., Inc. initially hired petitioners as fitness instructors on various dates between 2003 and 2012. They were later reclassified as freelance personal trainers. As instructors, they received fixed monthly salaries, 13th month pay, and commissions. Upon reclassification, commissions continued but other labor benefits—13th month pay, overtime pay, holiday pay, and rest day pay—were discontinued.

• Terms of the Freelance Agreement: The Freelance Personal Trainer Agreement imposed Minimum Performance Standards obliging petitioners to be assigned to any company-managed health club as the company deemed necessary, observe company rules, policies, and procedures, attend all educational training sessions, and guarantee a minimum of 90 hours of training per month and a required monthly sales amount. Failure to meet quotas could lead to salary deduction, warning, suspension, or termination. The company reserved the right to unilaterally revise the performance standards without notice.

• BIR Registration Requirement and Dispute: On March 20, 2017, respondents required all freelance trainers to register their freelance business with the BIR pursuant to BIR Revenue Regulation No. 4-2014. Compliance would yield a 3% commission increase; non-compliance would result in a 20% commission deduction and termination or non-renewal of the freelance agreement. Petitioners refused, taking the position that they were regular employees.

• Integration into the Company’s Business: Fitness First’s Amended Articles of Incorporation listed personal training, sports coaching, and fitness testing among its services. Petitioners conducted personal training exclusively within the company’s clubs, using its equipment, and were prohibited from providing training outside the club or directly collecting fees from clients. An exclusivity clause barred them from dealing with clients in their personal capacity.

• Performance Monitoring: The company tracked and recognized performance; petitioner Cristine Dela Cruz received a certificate for “TOP 9 in PT Conduction” in April 2013.

• Revert Offer: Respondents repeatedly offered petitioners the option to revert to their previous status as instructors, but petitioners declined, wanting to retain the benefits of both arrangements.

• Employer-Employee Relationship: Petitioners argued that they were regular employees because they performed work necessary and desirable to respondents’ business, were paid wages on a commission basis, and were subject to the employer’s power of control and discipline. They characterized the freelance agreement as a contract of adhesion whose legal consequences they did not fully understand.

• Procedural Fairness: Petitioners contended they were never served with the NLRC Resolution dated February 28, 2019 denying reconsideration. Consequently, the proper remedy was a petition for relief from judgment, not a petition for certiorari. They sought to set aside the Entry of Judgment due to extrinsic fraud in the service.

• Independent Contractor Status: Respondents maintained that petitioners were independent contractors engaged based on their unique skills and expertise, paid on commission, free to choose their work schedules, and not subject to control over the means and methods of conducting training. The requirement to hit sales and training hours was a result-oriented condition, and the power to terminate arose solely from breach of contract. The voluntary conversion to freelance status and the repeated offer to revert were emphasized.

• Procedural Defects and Prescription: Respondents moved for dismissal on the grounds that only one petitioner signed the verification and certification against forum shopping, not all counsels signed the petition, the NLRC was improperly impleaded, and the NLRC Decision had long attained finality. They further asserted that the illegal dismissal claims of four petitioners had prescribed.

• Procedural Defects and Finality: Whether the petition should be dismissed for failure to comply with verification requirements, improper impleading of the NLRC, or because the NLRC Decision had attained finality.

• Independent Contractor or Regular Employee: Whether respondents sufficiently proved that petitioners were independent contractors rather than regular employees.

• Solidary Liability of Manager: Whether respondent Liberty Cruz should be held solidarily liable with Fitness First Phil., Inc.

• Procedural Defects and Finality: The procedural objections were overruled. The verification and certification signed only by Escauriaga substantially complied with the rules because all petitioners shared a common interest and cause of action. The absence of signatures from all counsels was immaterial; one genuine counsel’s signature sufficed. The NLRC was ordered dropped as a respondent pursuant to Rule 45, Section 4, which does not require the lower tribunal to be impleaded in a petition for review. The doctrine of immutability of judgment was relaxed in the interest of substantial justice. The bailiff’s return, despite an inadvertent shading of “Decision,” showed that the Resolution dated February 28, 2019 was served, but the circumstances—the prompt filing of motions, the constitutional policy on protection of labor, and the meritorious nature of the case—justified a departure from strict finality. The existence of an employer-employee relationship was treated as a question of fact reviewable under the exceptions to the rule limiting Rule 45 petitions to questions of law, because the lower tribunals’ findings were based on a misapprehension of facts.

• Independent Contractor or Regular Employee: The employer-employee relationship was established. Under the four-fold test, all elements were present: respondents selected and engaged petitioners; paid wages on a commission basis, which the Labor Code expressly includes as a mode of wage payment; held the power to dismiss for failure to meet performance standards or for unqualified performance; and, critically, exercised the power of control. The freelance agreement contradicted the claim of independence: petitioners were required to be assigned to any company health club, observe rules and procedures, attend mandatory educational training sessions, guarantee a minimum number of training hours, and meet specific monthly sales targets. The company unilaterally set commission rates and training package specifications. These provisions demonstrated control over the means and methods of work. Under the economic dependence test from Francisco v. NLRC, petitioners’ services were integral to the business, they had no substantial capital investment, they were prohibited from training outside the club or dealing directly with clients, and they were wholly dependent on the company for continued employment. The successive one-year fixed-term contracts were construed as a stratagem to prevent the acquisition of security of tenure and were struck down as void under Dumpit-Murillo v. Court of Appeals.

• Solidary Liability of Manager: Liberty Cruz was not held solidarily liable. Corporate officers may be held jointly and severally liable in labor cases only upon proof of malice or bad faith. Petitioners failed to demonstrate that Cruz abused her position; the mere fact that she was the human resource manager, without evidence of bad faith, was insufficient for personal liability.

• Four-Fold Test and Control Test — To establish an employer-employee relationship, four elements must concur: selection and engagement, payment of wages, power to dismiss, and the power to control. The power of control is the most crucial determinant: an employer-employee relationship exists where the person for whom services are performed reserves the right to control not only the end to be achieved but also the manner and means used to reach that end. Here, the right to assign trainers to any club, impose rules and procedures, conduct mandatory training, set performance quotas, and specify training packages amounted to such control, negating independent contractor status.

• Economic Dependence Test — As formulated in Francisco v. NLRC, the economic realities of the relationship are examined under seven factors: (1) the extent to which the worker’s services are integral to the employer’s business; (2) the extent of the worker’s investment in equipment and facilities; (3) the nature and degree of control exercised by the employer; (4) the worker’s opportunity for profit and loss; (5) the amount of initiative, skill, judgment, or foresight required for the claimed independent enterprise; (6) the permanency and duration of the relationship; and (7) the degree of the worker’s dependence on the employer for continued employment. Applying this test confirmed that petitioners were economically dependent and thus regular employees.

• Employer’s Burden to Prove Independent Contractor Status — When employment status is disputed, the employer bears the burden of proving that the person whose services it pays for is an independent contractor, not a regular employee.

• Invalidity of Fixed-Term Contracts to Circumvent Security of Tenure — While fixed-term employment contracts may be valid, they must be struck down when the circumstances show that the periods were imposed to prevent the acquisition of security of tenure, as such contracts are contrary to law, morals, good customs, public order, or public policy (Dumpit-Murillo v. Court of Appeals).

• Relaxation of Immutability of Judgments — The doctrine of finality of judgments may yield to substantial justice when matters of life, liberty, honor, or property are involved, special or compelling circumstances exist, the merits warrant review, the cause is not entirely attributable to the fault of the party seeking relief, the review is not frivolous or dilatory, and the other party will not be unjustly prejudiced. This exception was applied in view of the constitutional policy on protection of labor and the lower tribunals’ misapprehension of facts.

• Solidary Liability of Corporate Officers in Labor Cases — Directors, officers, or human resource managers may be held solidarily liable with the corporation only if they acted with malice or bad faith in the illegal termination. Absent such showing, they are not personally liable.

• “The employment status of a person is not defined by what the parties say it should be. Rather, the employment relationship of parties is prescribed by law.”

• “When the status of the employment is in dispute, the employer bears the burden to prove that the person whose service it pays for is an independent contractor rather than a regular employee with or without fixed terms.”

• “Under the control test, an employer-employee relationship exists where the person for whom the services are performed reserves the right to control not only the end to be achieved, but also the manner and means to be used in reaching that end.”

• “The law abhors technicalities that impede the cause of justice. The Court’s primary duty is to render or dispense justice. A litigation is not a game of technicalities. … Technicality, when it deserts its proper office as an aid to justice and becomes its great hindrance and chief enemy, deserves scant consideration from courts.”

• “With the precious constitutional guarantee in place for the protection of labor, the Court, in circumstances as in this case, will not hesitate to strike down as invalid any employer act that attempts to undermine workers’ tenurial security.”

• Dumpit-Murillo v. Court of Appeals, 551 Phil. 725 (2007) — Applied; relied upon for the rule that fixed-term contracts used to block security of tenure are void. The successive one-year freelance agreements were struck down under this doctrine.

• Francisco v. National Labor Relations Commission, 532 Phil. 399 (2006) — Applied; the economic dependence test was adopted, and its enumerated factors were used to conclude that petitioners were economically dependent, hence employees.

• Orozco v. Court of Appeals, 584 Phil. 35 (2008) — Applied; cited for the definition of an independent contractor and for the primacy of the control test.

• Sonza v. ABS-CBN Broadcasting Corp., 475 Phil. 539 (2004) — Distinguished; respondents invoked this case to argue that petitioners’ unique skills rendered them independent contractors, but the Court did not apply it given the substantial control exercised by the company.

• Republic v. Dagondon, 785 Phil. 210 (2016) — Applied; used to support the relaxation of the immutability of judgment rule in favor of substantial justice.

• Acaylar, Jr. v. Harayo, 582 Phil. 600 (2008) — Applied; quoted for the principle that technicalities should not obstruct the dispensation of justice.

• Sumbilla v. Matrix Finance Corp., 762 Phil. 130 (2015) — Applied; set forth the factors warranting relaxation of immutability.

• Martinez v. Magnolia Poultry Processing Plant, G.R. Nos. 231579 & 231636, June 16, 2021 — Applied; reiterated the four-fold test and the primacy of the control test.

• Ditiangkin v. Lazada E-Services Philippines, Inc., G.R. No. 246892, September 21, 2022 — Applied; reiterated that the employer bears the burden to prove independent contractor status.

• Nightowl Watchman & Security Agency, Inc. v. Lumahan, 771 Phil. 391 (2015) — Applied; supported the rule that a Rule 45 petition need not implead the lower tribunal.

• Article 294 [now 279], Labor Code of the Philippines — Security of tenure provision. The Court relied on it to hold that petitioners’ regular employment could not be terminated except for just or authorized cause, and that the freelance agreement scheme was an unlawful circumvention of this right.

• Article 97 (definition of “wage”), Labor Code — Defines “wage” to include remuneration paid on a commission basis. The Court cited this provision to confirm that the commissions received by petitioners constituted wages, establishing the payment-of-wages element.

• Rule 45, Section 4, Rules of Court — Contents of a petition for review on certiorari, specifying that the lower court or tribunal should not be impleaded. The NLRC was dropped as a respondent pursuant to this rule.

• Rule 5, Section 5, NLRC Rules of Procedure — Prohibited pleadings before the NLRC, which includes a Petition for Relief from Judgment. The lower tribunals invoked this to dismiss petitioners’ petition for relief, but the Supreme Court ultimately relaxed procedural rules to reach the merits.

• BIR Revenue Regulation No. 4-2014 — Guidelines for monitoring service fees of professionals. The company’s directive requiring freelance registration was based on this regulation and precipitated the dispute.

Leonen, SAJ., M. Lopez, J. Lopez, and Kho, Jr., JJ., concurred.